Access will boost HUF and improve confidence, but the bulk of funding will remain on hold
Releasing a portion of EU funding would be positive for the Hungarian outlook, and MNCs should be prepared for news of a final deal to drive currency appreciation, although in the context of the current mixed economic outlook, we note an underlying volatility is likely to persist. Additional funding may present opportunities for B2G clients operating in the funded verticals, and companies in this space should consider liaising with government outreach teams to assess the scale of any opportunities this might present and aim to maximize any available opportunity.
- The Financial Times reported information from anonymous officials saying that the EU Commission was likely to unlock EUR 13 billion worth of funding for Hungary by the end of November.
- This was presented by two of the officials in question as a quid-pro-quo deal, with the commission needing Hungarian support to pass an expanded budget with significant additional financing for Ukraine.
- The report—and particularly the form of the reporting suggesting a reciprocal deal—has been subsequently denied by both the EU and Hungary.
Although both sides have been quick to pour cold water on talk of a reciprocal deal, signs of progress on at least a portion of Hungarian funding due from the EU have been evident since earlier this year. We assess that this latest round of news chatter is a promising indication that a funding release is nearing, and we expect access to funding totaling up to around EUR 13 billion to be announced before the end of Q4. We caution, however, that substantial portions of Hungarian funding, which include more than half of the total theoretically accessible, will continue to remain on hold. This is built into our base case for next year’s economic outlook.
Hungary is theoretically entitled to payments of EUR 21.7 billion from Cohesion Policy funding in the 2021–2027 budget. The country is further able to access EUR 5.8 billion in non-refundable support from the post-pandemic Recovery and Resilience Fund (RRF) and has requested a further EUR 3.9 billion in loans. All of these funds, however, are currently blocked by a variety of concerns over judicial independence, graft, discrimination toward the LGBTQ+ community, and restrictions of academic freedoms. The current round of talks is specifically focused on judicial independence after the Hungarian parliament passed judicial reforms aimed at meeting EU requirements in Q2. We expect that the current leaks are indicative of the fact that the commission will find these changes adequate to meet its conditions and agree to the release of funding, at the latest once the end of the 90-day review period is reached. We note that the countdown can be stopped while clarification from the government is sought, leading to some uncertainty over exact timings.
After a challenging year economically and facing a burgeoning public deficit, these are funds that Hungary will find extremely valuable. The forint strengthened on the news initially, and unlocking of a substantial portion of the funding due is likely to strengthen investor sentiment toward Hungary and shore up the currency further. Despite this potentially positive news though, we note that Hungary is currently facing significant headwinds and that the economic environment is likely to remain challenging in coming months before showing some consistent improvement into Q2 2024. We do not expect imminent release of the RRF, which remains subject to the completion of 27 “super-milestones,” including a number outside of the judicial independence reforms passed, nor do we expect the roughly EUR 8.8 billion currently on hold due to anti-corruption, minority rights, and academic freedoms to be released in short order. Our base case remains that a substantial portion of this remaining funding will fail to be unlocked during the budgetary period.
Strong denials of the funding being related to a quid-pro-quo deal by Commission VP Vera Jourova should be seen as an attempt to forestall robust criticism from the EU Parliament, which has called for a strong line to be taken against the Fidesz government of Viktor Orban over transgressions from EU norms. While the parliament cannot block the release of funding, the commission is expected to prefer to avoid potential delays to its budget, and the Hungarian government will likely seek to portray any agreement as a victorious access to funds unfairly restricted; neither side should therefore be expected to admit to any deals. Talk of a deal though underscores that the release of funding is unlikely to presage any fundamental improvement of relations between the commission and the current Hungarian government, with an essentially combative and transactional approach expected to persist. This also feeds into our expectation that Hungary will continue to struggle to unlock all funds, and that talks between the two parties will continue to be drawn out, clouding long-term predictability.
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